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Railroads and the Brazilian Economy Before 1914 William R. Summerhill• Department ofHistory University ofCali•rn& LosAngeks Althoughthe railroadwasthe mostcelebrated technological innovation of the nineteenthcentury,its impactvariedconsiderably dependingon the settinginto whichit wasintroduced. For Brazil,historians often claimthat railroaddevelopment intensified dependence on foreignproductand capital marketsin the secondhalf of the nineteenthcentury.Accordingto this scenario, railroadenterprises, intended mainlyto caxryplantation cropsto port, benefitedforeigninvestorsand export agriculture at the expenseof the economyasa whole. Basedon an extensivearrayof new evidenceand cliometricmethods, thisstudy'sfindingsare sharplyat oddswith standing conclusions aboutthe impact of nineteenth-century railroaddevelopmentin Brazil. It examines modernBrazil'sfirstwaveof transport improvements, whichbeganwith the earliest construction of railroads in the 1850s and continued until motor vehiclesbeganto supplantsteamlocomotionafter 1900.The railroadheld profoundconsequences for theeconomy, but not thoseheretofore stressed in the historiography. Relyingheavilyon risk-reducing subsidies, foreigncapital, and governmentregulation,Brazil capturedsubstantial gainsfrom the iron horse.Indeed,therailroadprovedindispensable to Brazil'semergence around 1900asoneof thefastestgrowingeconomies in theWesternworld. This studyaddresses threemainquestions. First,whatdirecteffectsdid the railroadhaveon the economy? Second,what differencedid it makethat railroads were oftenownedby foreigners and regulated by the government? And third,whatbroadersetof outcomes mightbe attributed to the courseof railroad development in Brazil? In posing answers to thesequestions I drewon a varietyof sources, including the operating andfinancial reportsof railroad companies archivedin Londonand throughout Brazil,the contemporary commercial press,andrailroadcensuses andstudies of Brazilian government ministriesfrom the 1850sthrough1913. Thesematerialspermittedthe construction of originaldata setson pre-railtransportcosts,government • Thissummary captures themainthemes of mydissertation, completed in 1995under the direction of Stephen Haber,GavinWright,andAvnerGreif,in the Department of Historyat Stanford University. I gratefully acknowledge thesupport of theU.S.Department of Education Fulbdght-Hays programandtheJointCommittee. on LatinAmedcanStudies of the American Council of Learned Societies and the Social Science Research Council. BUSINESSAND ECONOMIC HISTORY, Volume Twenty-six, no.2,Winter1997. Copyright ¸1997 bytheBusiness HistoryConference. ISSN0894-6825. 318 RAILROADS AND THE BRAZILIAN ECONOMY BEFORE 1914/319 subsidies, and the operations and financial performance of Brazil'smajor railroads. Thesedataprovided the empirical basefor an examination of the scopeandmagnitude of therailroad's principal directandindirect linkages to theeconomy. In Braziltherailroad's principal consequences maybesummed upin the following terms. Theforward linkage to transport-using activities waslarge,and theimpactof cheaptransport ontheinternal economy quickly surpassed that of the exportsector. However,backward linkages to activities whoseoutput the railroadmightotherwise haveusedintensively, especially industry, were weak.Nonetheless, the employment andincomeeffectsthat wereexported abroad weresmall.Theopportunity costsof foreignfinance for thedevelopmentof domestic capital markets werelow.Thestructural impactof railroads in Brazildifferedmarkedly fromthe caricature of a dependent andunderdeveloping LatinAmerican economy. The broaderinstitutional consequences, particularly regarding thewayinwhichtherailroad transformed theroleof the statein theeconomy, werepositive in the shortrun,but likelynegative in the longertenn. Serious railroaddevelopment in Brazilbeganrelatively late.An uncertain politicalsituation andpoorlydeveloped capitalmarkets handicapped attempts to buildrailroadsbefore1850.Pressurefrom the land-and slave-owning elite on government to improvetransportincreased throughmid-century. The government mediated thesedemands by guaranteeing minimumdividend paymentsto investors in the desired projects. Whilenativerailroadentrepreneurs andprojectpromoters oftenshared broaddevelopmental concerns, thebulkof politicalsupportfor the policycamefromplantersseeking to enhance their personalwealth.Dividendguarantees from the government harmonized the goalsof theplanterclass withthedesireof raikoadinvestors to avoidexcessive risk.Althoughthenumberof government-subsidized railroads increased markedlybeginning in the 1870s,muchof Brazilremained outside thereachof the railroadby 1913.Giventhereadyavailability of coastwise shipping, mostlines werebuiltto linkportsto theinterior.Combined withthedistributive character of dividendguarantees enacted by the Parliament, sucha scattered patternof subsidy and construction revealedthat railroaddevelopment proceeded with litdeconsideration givento establishing a large,national network. However, the absenceof an integratedrailroadgrid in no way attenuated theimpactof thenewmodeof transport for Brazil.In fact,railroads in Brazilwereremarkable for the verylargedirectbenefitstheygenerated. In termsof thesegains,railroadsprovedto be tremendously importantfor economicgrowth.Considerthe direct benefitsobtainedon freight and passenger services. In contrastto the UnitedStates,Brazillackedcheap substitutes for railroads. Riverconditions in mostof thecountryhindered longdistance shipment. Most freightandpassengers movedoverhillyterrain,in tropicalconditions, on roadsthatweredifficultto maintain. By supplanting mule trains,carts,and stagecoaches on eventhe best roads,the railroad dramatically reduced thecostof transporting bothpassengers andfreight.The precipitous fallin overland transport charges extended thefeasible marginof 320 / WILLIAM R. SUMMER.HILL agriculture, andintegrated productandlabormarkets. Brazilian railroads both released resources to existingactivities in the economyand stimulated the creation of new ones. Estimates of the railroad's directsocialsavings reveala largepositive impacton thelevelof national income.The forwardlinkage to transport-using activities wasexceptionally strong. To inferthemagnitude of thegainsafforded by railroads,I conducteda counterfactual exercisethat measuredthe hypothetical costsof shutting downtherailroadsector in 1913.The costsof relying onthenextbestalternative - cartsandmulescompeting overimproved roads- providea staticapproximation of thebenefitscreated by therailroad's cheaptransport sexyices. At theupperboundmorethan30%of Brazil's gross domestic productin 1913wasdueto theresources savedon shipping freight. Evenundermorerestrictive assumptions, thefreightsocialsavings werestillat least10% of GDP. The benefitsfrom passenger travel,thoughappreciable, weremoremodest.If first-class passengers had shiftedto stagecoaches, and second-class passengers hadwalked,thecoststo theeconomy wouldhavebeen small.Together, passenger andfreightbenefits account for a largeportionof the econoroy's gainsbetween1885,when the railroadsectorbeganits first roundof veryrapidgrowth,and1913. While the railroad'sforwardlinkagewas powerful,strongbackward linkages wereconspicuously absent. In contrast to the largegainsfromlower transportcosts,the quantityof Brazilianmanufacturing outputconsumed by railroads wassmall.Demands for coal,rails,androllingstockweremetlargely by overseas suppliers. There was little linkagefrom the railroadsectorto producersof key inputs,especially industry.Instead,there was backward "leakage" of indirectbenefitsabroad.Brazilexported incomeandemployment effects,chieflyto GreatBritain.For manyhistorians, it wastheverysuccess of railroads in reducing transport coststhatledto the failureto createbackward linkages. In thisview,therulingclass's resolute ambitionto obtainrailroads as quicklyaspossible, combined withtheabsence of policies thatforgedlinkages to coal mining and metal production,meant that railroaddevelopment constituted a foregone opportunity to industrialize. However,thisviewfailsto squarewith evidenceon the role of railroads in the industrialization of the more advanced economies, or with the obstaclesto modern iron and steel production in Brazil.In the UnitedStates, for example, railroadconstruction andoperation tappedextantmanufacturing activities thatdepended onlypartly on thedemands of therailroadsector. Brazil,by contrast, hadweakbackward linkages because railroaddevelopment camewellbeforethe riseof domestic industry.Moreover,directoutlayson foreignrailroadinputswereminuscule relativeto thebenefits of cheaptransport, comingto, at most,lessthan0.5% of GDP in 1913.The opportunity costsof thisreliance on foreigninputswere small.Lackingore andcoaldeposks of sufficient qualityto sustain a modern iron and steelindustry in the nineteenth century, hadBrazilpursued protectionistpoliciesdesignedto forgebackwardlinkages,railroaddevelopment would have groundto a halt in the late 1800s,therebyinstitutionalizing backwardness. RAILROADS AND THE BRAZILIAN ECONOMY BEFORE 1914/321 In termsof the unbalanced overallconsequences of railroads,Brazil bearsa strongresemblance to otherrelativelybackwardeconomies, suchas Mexicoand Spain.However,the distribution of directgainsfrom railroads differedmarkedlyfromthatin Mexico,wherecheaptransport anddiscriminatoryfreightratesfavoredforeign-owned exportactivities. Bycontrast, Brazilian railroads, evenwhenforeign-owned, serveda growingandincreasingly diverse economycharacterized by Brazilian-owned industry,andnative-Brazilian and immigrant farming. Governmentregulationensuredthat consumersof transportservices reapedthe bulkof the railroad's benefits,so that transport savings accruedprimarilyto Brazilians. The government continuously pushed railroadrates down, and held them especially low for agricultural goods producedand consumeddomestically. Foreign-owned railroadcompanies earnedcompetitiveprofits,but rarelymuchmore than that. Brazilian-owned railroadswere betterat opposingdownwardpressure on rates,and earned slightlyhigherprofits. Both British-owned and Brazilian-owned railroads receivedsomeexcesssubsidies, but the lossesto the economyfrom this extravagance weresmall.Especially lowratesondomestic-use goods,mandated by government, fostered an expanding domestic market.Overtimetherelative shareof exports in totalrailroad freightdeclined. Sodidtheshareof exports in the economy's overalloutputmix. The benefitsthat railroadsbestowedon Brazilaccrued increasingly to thedomestic-use sectorof theeconomy, andnot to theexportsectoror foreigners. Government policytowardrailroads helped to shifttheeconomy's trajectory dramatically upward,andmovedit awayfrom theexport"bias"of theearlynineteenth centmy. Beyondtheir overt impactBrazilianrailroadsalsocreatedlessvisible benefitsand costs.The railroad's interaction with the institutional setting createdunanticipated consequences whoseimplications for economic perfor- mancedefythe staticmeasures of linkages. Theseencompass somebroader effectsof the railroadfor the long-runtrajectory of Brazilian development. Firstis the connection between railroads andinternalbarriers to trade.By integrating product markets therailroad elLminated natural protection formany agricultural producers. Brazilianpoliticalorganization facilitatedthe rise of internaltariffsin the late nineteenth century. Theseprevented the railroad's gainsfrombeingevenhigherthantheywere.Protectionist barriers offsetsome transport-cost reductions on someproducts in someregions, andconcentrated themin others, thuslikelyworsening regional andclass inequalities. Rapidrailroad development alsoaltered thesocial andpolitical mapof Brazil.The patternof railroad construction andsubsidy accelerated political divisions overtheinstitution of slavery, contributing to thestrengthening of politicalsupportfor slavery in thecenter-south by increasing thedemandfor slaves, andweakening k everywhere else.The regionalredistribution of the slavepopulationin the earlydecadesof railroaddevelopment aidedin undermining the statusquo supporting slavery in Parliament. The railroad's opening of a fertilenewfrontierin S3oPauloattracted immigrant laborfrom southern Europe,heralding boththe onsetof moderneconomic growthand compounding starkregional disparities in incomeandwealth. 322 / WILLIAM R. SUMMERHILL Railroaddevelopment furtherpromotedthe formationof an important new classof professionals in both the publicand privatesectors. Although foreigninvestmentand stateownershipremainedprominent,severalof the countty'slargestand most successful railroadswere ownedby joint-stock companies organized withinBrazil.The imperatives of modemproduction and coordination strengthened nativeentrepreneurship andbusiness organization. At the sametime, stateownershipof railroadsexpanded.In governmentowned railroads the dictates of effective administration created a cadre of professional staff,managers, andplanners in thepublicsector. And theneedto monitorthe newindustry,especially the foreignfirmsinvolvedin it, createda shrewdand savvygroup of regulatorsand railroadexperts.Becauseless informationis available on theseeffects,gauging theirimpactin quantifiable termsis not possible. Nonetheless, theymaywellbe no lessimportantin the longtermthantheobservable consequences described earlier. The studyof the railroad's principallinkagesin Brazilillustrates the myriadconsequences of transport improvements forthetransition to improved economic growth.The resultsof thisstudyalsocallinto questionprevailing assumptions andgeneralizations abouttherolesof foreigninvestment, andthe state,in Latin Americaneconomicdevelopment. In the Braziliancase,the claimsaboutthe consequences of railroaddevelopment foundin dependency interpretations now appearexaggerated, at best.Whenconsidered withinthe confinesof conventional economic analysis, the railroad's accomplishment in Brazilwassubstantial. The government subsidized andregulated railroadsto reducethe burdenof hightransport costsfor a ruralelitethat specialized in exportagriculture. Foreigners invested in thoserailroads because theyfound theriskstolerable andbelieved theystooda chance of receiving goodprofits. Thoughbuilt usingforeigncapitalto link plantations to port, the railroads ultimatelyregisteredlarge gains for domesticmarketsand creatednew opportunities for immigration and industry.Early railroadenterprises also launched equityon thecountty's leading stockexchanges, aidingin theriseof modemcapitalmarketsin Brazil. Thoughtherailroad's rolein thetransition to modemeconomic growth canno longerbe in doubt,in thelongertermtheimpactof anytechnological innovationis alwayssubjectto question.In Brazil,railroaddevelopment increased the retumfromlobbyingfor govemment intervention by private entrepreneurs. Thedemonstrable effects of thegovernment's heavyhandin the economy doubtless contributed to thegrowthof stateintervention in economic affaksmoregenerally, leadingto marketinterventions that wereof dubious valueat best,and outrightdistortingand costlyat worst.To the extentthat railroads reduced transport costs, theymaybe credited withboosting thelevel of economicactivitybefore1914.However,to the extentthat the broader process of railroaddevelopment contributed to a bloatedgovernment sector andinward-looking policies afterWorldWar I, therailroad's contribution may yetproveculpable in equaldegree.